economic trends affecting automobile insurance

22
Economic Trends Affecting Automobile Insurance AIPSO 10 th Residual Market Planning Conference Providence, RI April 10, 2012 Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038

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Economic Trends Affecting Automobile Insurance. AIPSO 10 th Residual Market Planning Conference Providence, RI April 10, 2012. Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 - PowerPoint PPT Presentation

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Page 1: Economic Trends Affecting Automobile Insurance

Economic Trends Affecting Automobile Insurance

AIPSO 10th Residual Market Planning ConferenceProvidence, RIApril 10, 2012

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: (917) 494-5945 [email protected] www.iii.org

Page 2: Economic Trends Affecting Automobile Insurance

The Strength of the Economy Will Affect P/C InsurerGrowth Opportunities

2

Growth Will Expand Insurable Exposures and Help Absorb Excess Capital

Page 3: Economic Trends Affecting Automobile Insurance

3

Real GDP Growth: Past Recessionsand Recoveries, Yearly, 1970-2012

Source: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.

-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%

Real GDP Growth (%)

In most recoveries, real yearly GDP growth is

often 4% or moreIn the current recovery, real yearly GDP growthhas been 2.4% or less

But, following the 1991 and 2001 recessions, real yearly GDP growth was weaker than 4%

Page 4: Economic Trends Affecting Automobile Insurance

4

March 2013 Forecasts of Quarterly US Real GDP for 2013-14

2.0% 2.1% 2.2%

2.8% 2.9% 3.0%

3.6% 3.7% 3.7%

1.7%1.6% 1.7%

1.1%

2.6%2.0%

2.5%2.7%

3.4%3.6%3.5%

2.9%

0%

1%

2%

3%

4%

13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4

10 Most PessimisticMedian10 Most Optimistic

Sources: Blue Chip Economic Indicators (3/13); Insurance Information Institute

Real GDP Growth Rate

Page 5: Economic Trends Affecting Automobile Insurance

5

Personal Auto Insurance Premium GrowthDepends on Exposure Growth,

Price Level Changes, and Other Factors

Page 6: Economic Trends Affecting Automobile Insurance

7

Monthly Change* in Auto Insurance Prices, 1991–2013

*Percentage change from same month in prior year; through January 2013; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

“Hard” markets tend to occur

during recessions

A pricing peak, at a 5.4% rate

Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)

Latest (Jan 2013)

at 4.9%

Page 7: Economic Trends Affecting Automobile Insurance

8

Auto Loans and other NonrevolvingCredit Outstanding, 1990–2013*

Note: Recessions indicated by gray shaded columns. *Latest data is for January 2013, preliminarySources: Federal Reserve at http://www.federalreserve.gov/datadownload/Download.aspx?rel=G19&series=8ee7aa36107a130bcc862d44824a3b86&lastObs=&from=&to=&filetype=csv&label=include&layout=seriescolumn&type=package National Bureau of Economic Research (recession dates); Insurance Information Institutes.

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

No growth in outstanding nonrevolving credit for

three years

8

$ Billions

Spurt began in

Dec. 2010

Page 8: Economic Trends Affecting Automobile Insurance

9

17.3

3

16.7

7

15.1

3

9.59

10.5

7

-14.

29

-14.

12

-13.

30

-12.

08

-11.

13

-10.

07

-12.

07

-12.

71

-14.

02 -10.

43

-10.

63

-12.

0

-11.

0

-12.

0

-13.

015

.80

18.0

9

17.5

1

17.6

4

16.9

4

17.4

2

17.2

9

12.7

0

14.0

0

15.3

0

(15)

(10)

(5)

0

5

10

15

20

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E

2013

F

2014

F

new vehicle registrations scrappageMillions of Units

Auto/Light Truck Exposure Changes, 2000-2014F

Sources: NADA, State of the Industry Report 2012, p. 16, at www.nada.org/nadadata citing R. L. Polk; new vehicle estimate/forecasts from Blue Chip Economic Indicators, 3/2013 issue; scrappage estimates/forecasts from Insurance Information Institute.

In a “normal” 2-year span, new cars would replace about 25 million old cars, but in 2009-10 only about 17 million old cars were replaced

Page 9: Economic Trends Affecting Automobile Insurance

10

$125

$135

$145

$155

$165

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011215

220

225

230

235

240

245

250

Private Passenger Auto Premium No. of Vehicles in Operation (millions)

PP Auto premiums written are recovering from a period of no growth attributable to the weak economy affecting new vehicle sales, car choice,

and increased price sensitivity among consumersSources: A.M. Best; NADA, State of the Industry Report 2012, p. 16, at www.nada.org/nadadata citing R. L. Polk; Insurance Information Institute.

PP Auto NWP vs. # of Vehiclesin Operation, 2001–2011

$ Billion

Page 10: Economic Trends Affecting Automobile Insurance

11

Something Unusual is Happening:Miles Driven*, 1990–2013

*Moving 12-month total. The latest data is for January 2013. Note: Recessions indicated by gray shaded columns..Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

2,100

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

A record: miles driven has been below the prior

peak for 62 straight months. Previous record

was in the early 1980s (39 months)

Will the trend toward hybrid and non-gasoline-powered vehicles affect

miles driven? What about the aging and

retirement of the baby boomers?

Miles Driven Growth per 5-Yr Span1997 vs. 1992: 13.9%2002 vs. 1997: 11.5%2007 vs. 2002: 6.1%2012 vs. 2007: -3.0%

Some of the growth in miles driven is due to population growth: 1997 vs. 1992: +5.1%2002 vs. 1997: +7.4%2007 vs. 2002: +4.7%2012 vs. 2007: +3.4%

Page 11: Economic Trends Affecting Automobile Insurance

14

Inflation and Claims Trends

Page 12: Economic Trends Affecting Automobile Insurance

15

Prices for Hospital Services:12-Month Change,* 1998–2013

*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

2%

4%

6%

8%

10%

12%

14%

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession Outpatient Services Inpatient Services

Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)

Page 13: Economic Trends Affecting Automobile Insurance

16

Forces that Drive Car Repair Costs:12-Month Change,* 2001–2013

*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

2%

4%

6%

8%

10%

12%

14%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession Auto repair Auto body work

Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)

Page 14: Economic Trends Affecting Automobile Insurance

-9%

-6%

-3%

0%

3%

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

PP Auto BI Liability Paid Claim Frequency*, 2004:Q1-2012:Q3

*measured as % change from same quarter, prior year Source: ISO Fast Track data.

% Change from same quarter, prior year

The frequency of PP Auto BI paid claims (paid claims as a percent of earned-car-years) fell (at a slowing rate) from 2004-2010, rose in 2011, fell again.

Page 15: Economic Trends Affecting Automobile Insurance

0%

1%

2%

3%

4%

5%

6%

7%

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

Trend in PP Auto BI Liability Average Loss* 2008:Q4-2012:Q3

*measured as % change from same quarter, prior year Source: ISO Fast Track data.

% Change from same quarter, prior year

BI liability average loss seems to be moderating.

Page 16: Economic Trends Affecting Automobile Insurance

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

PP Auto PD Liability Paid ClaimFrequency*, 2008:Q4-2012:Q3

*measured as % change from same quarter, prior year Source: ISO Fast Track data.

% Change from same quarter, prior year

The frequency of PP Auto PD liability paid claims fell in 2008-09but has been essentially flat 10 the last 12 quarters.

Page 17: Economic Trends Affecting Automobile Insurance

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%20

08:Q

4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

Trend in PP Auto PD LiabilityAverage Loss 2008:Q4-2012:Q3

*measured as % change from same quarter, prior year Source: ISO Fast Track data.

% Change from same quarter, prior year

PD growth in average loss trending down

until 2010:Q3…

Then rising fairly steadily until 2012:Q2

Page 18: Economic Trends Affecting Automobile Insurance

21

CDC Report: Cell Phone Use While Driving, US and Europe, Fall 2011

Sources: “Mobile Device Use While Driving—United States and Seven European Countries, 2011,” in Morbidity and Mortality Weekly Report, Centers for Disease Control and Prevention, Vol. 62, No. 10, (March 15, 2013) available at http://www.cdc.gov/mmwr/preview/mmwrhtml/mm6210a1.ht5m?s_cid=6210a1_e ;Insurance Information Institute

7.8%

2.5%

8.8%

4.3%

10.4%

5.2%

12.8%

2.8%

15.7%

8.1%

19.5%

5.9%

20.4%

6.5%7.7%

27.5%

0%

10%

20%

30%

Talked on cell Texted/emailed

U.S. U.K. Germany France Spain Belgium Netherlands Portugal

“In the past 30 days, how often have you talked on the phone while you were driving?”

“In the past 30 days, how often have you sent a text message or e-mail while you were driving?”

Percent saying“regularly” or“fairly often”

Page 19: Economic Trends Affecting Automobile Insurance

22

Investments

Page 20: Economic Trends Affecting Automobile Insurance

23

U.S. Treasury Security Yields*:A Long Downward Trend, 1990–2013

*Monthly, constant maturity, nominal rates, through Feb 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

U.S. Treasury security yields

recently plunged to record lows

23

Page 21: Economic Trends Affecting Automobile Insurance

24

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2011

16.0%

15.2%

15.7%

16.2%

16.3%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%15.2%

14.4%

16.0%

15.4%

0% 20% 40% 60% 80% 100%

2003

2004

2005

2006

2007

2008

2009

2010

2011

Under 1 year1-5 years5-10 years10-20 yearsover 20 years

Sources: A.M. Best; Insurance Information Institute.

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 16.9% in 2011) and then trimmed bonds in the 5-10-year category. Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in

investment income along with lower yields.

Page 22: Economic Trends Affecting Automobile Insurance

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